Three essays in fiscal policy

• Main Author: Trzeciakiewicz, Dawid
• Format: Dissertation
• Language: English
• Published: University of Hull 2014
• Subjects: Business

This thesis presents three papers on fiscal policy. The first paper "Macroeconomic impacts of fiscal policy shocks in UK; a DSGE analysis" (joint with Keshab Bhattarai) uses an estimated new-Keynesian dynamic stochastic general equilibrium (DSGE) model to analyse the effects of fiscal policy in the UK. We show that positive shocks in government consumption and investment result in the highest stimulus in the short term, whereas the capital tax cut and the positive public investment shock in the longer horizon. On the government’s expenditure side public investment remains the most stimulating instrument even if we allow for a constant elasticity of substitution index of private and public consumption in utility. We also find that, the nominal and real frictions present in the model tend to influence stronger the level of labour and capital tax multipliers and less public expenditure multipliers. The second paper "Credit constraints, the housing market, and fiscal policy" investigates the effects of fiscal policy in an estimated new-Keynesian open-economy DSGE model with a housing market and indebted households. We show that house prices drop following a negative shock to government transfers, and a positive shock to public spending, public investment and taxes. The results reveal that the financial deregulation increases the sensitivity of fundamentals to fiscal policy. In particular, in the case of a stimulus, the financial deregulation contributes to a weakening of multipliers in the case of government consumption and investment and tends to improve multipliers for public transfers and tax cuts. The third paper "Who is afraid of austerity? The redistributive impact of fiscal policy in a DSGE framework" (joint with Richard McManus and Gulcin Ozkan) explores the distributional consequences of fiscal austerity using a medium scale new-Keynesian DSGE model with a richly specified fiscal sector. We show that agents who are credit constrained are most exposed to austerity in contrast to agents with full access to financial markets. This is particularly true in the case of rises in taxes on labour income and cuts in transfers. In general, tax based consolidations exhibit more conflict than spending based ones. Our results also reveal that the distributive impacts of fiscal consolidations are amplified the longer the austerity persists; the slower the policy reversal and when monetary policy reaches its zero lower bound.